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ABB's Bet Hinges on U.S. Energy Rules

By

Katharina Bart

Updated Nov. 30, 2010 10:54 a.m. ET

ZURICH—
ABB Ltd.
is taking a steep bet that tougher U.S. energy regulations will spread to other major industrialized countries such as China, as it spends $4.2 billion to buy
Baldor Electric Co.
, a 41% premium on the U.S. company's prior share price.

The Zurich-based power and industrial-automation company hopes to tap into U.S. motor-efficiency legislation coming into force Dec. 19 and mandating tougher environmental standards for electrical motors used in industrial settings. ABB estimates more than 1.4 million motors will be replaced in the U.S. annually as a result. ABB expects countries such as Canada, Mexico and some European states to adopt similar rules next year, as well as China and Australia to eventually follow, ABB said Tuesday in a presentation.

Measures such as motor replacement as mandated by the Energy Independence and Security Act could lower motor-driven systems' share of industrial energy use in the U.S. by more than 10% by 2020, according to management consultant McKinsey & Company.

The wager—ABB's priciest in a recent string of purchases under former
General Electric Corp.
GE -0.80%
executive
Joe Hogan
—hinges on ABB successfully wringing the $100 million cost savings from the deal and "at least" the same in synergies from combining the two companies, according to analysts, including Bank Vontobel and independent brokerage Helvea.

"There is good scope for ABB to achieve these given its excellent geographical position and strong product range, particularly in the drives market. This will enable it to sell Baldor products outside the United States and strengthen the selling of ABB's existing products in the U.S.," Helvea analyst Alessandro Migliorini said.

The savings—mainly from reducing the costs of purchasing materials—are set against roughly $50 million in costs to integrate Baldor, which ABB will book early next year.

Under the terms of the agreed deal, ABB is paying a 41% premium for Baldor—$63.50 a share, compared with Monday's closing price of $45.11—or $4.2 billion in total, including $1.1 billion in net debt.

Investors initially took to the acquisition cautiously, according to traders due to the high price tag, but the stock later snapped back from early losses.

ABB said it could continue its shopping spree, even after using part of its roughly $5.3 billion cash pile to buy Baldor, which bolsters ABB's position in the U.S. market for motors considerably.

"We still have excess cash, and some people would define our balance sheet as efficient, so we continue to look at opportunities out there," Mr. Hogan said on a media call detailing the acquisition.

Specifically, ABB appears to still be smarting from losing the expensive battle for U.K.-based maker of backup-power systems for computer centers Chloride Group PLC in July, won by
Emerson Electric Co.
EMR 1.08%
The market for uninterruptible power-supply data centers is one in which ABB would like to play a larger role through acquisitions, Mr. Hogan said.

ABB is buying Baldor, which mainly competes with
Regal-Beloit Corp.
RBC 0.25%
,
Siemens AG
and GE, as the Fort Smith, Ark.-based company begins to benefit from improving global demand, after a slump in demand last year. The two companies fit "like a glove" with little overlap in products or geographies, ABB executive
Ulrich Spiesshofer
said.

This year, ABB acquired U.S.-based Ventyx, which makes software for the energy sector, for more than $1 billion, spent about $965 million to raise its stake in its Indian subsidiary,
ABB Ltd. (India)
EQABB 0.85%
to 72% from 52%, and bought U.S. measurement-product maker K-TEK for an undisclosed price.

The deal marks ABB's splashiest buy since it staved off bankruptcy in 2002 under the burden of asbestos-related lawsuits after the purchase of U.S.-based Combustion Engineering. The acquisition of U.S.-based Combustion Engineering in 1989 and the $1.5 billion purchase of Elsag Bailey, a Dutch maker of industrial control systems, in 1998, rank among ABB's largest deals to date.